Why Articles of Incorporation Matter More Than You Think
When people start a nonprofit, Articles of Incorporation often feel like a formality. Something you file once, put in a folder, and never think about again. In reality, Articles of Incorporation are one of the most important documents your nonprofit will ever adopt. They are the legal foundation of the organization. When they are clear and aligned with Iowa law and IRS expectations, everything that follows is easier. When they are vague, outdated, or copied from a generic template, problems tend to surface later, usually when the stakes are higher.
This guide is designed to explain what Articles of Incorporation actually do for Iowa nonprofits, what truly matters in drafting them, and how to approach this document with confidence.
How Articles Create a Nonprofit Under Iowa Law
Articles of Incorporation are the document that legally brings a nonprofit corporation into existence under Iowa law. Until they are filed and accepted by the Iowa Secretary of State, the organization does not exist as a legal entity. Once filed, the nonprofit can open bank accounts, enter into contracts, hold board meetings, and begin operating in a formal and recognized way.
Why Articles Matter for Federal Tax Exempt Status
If a nonprofit intends to apply for recognition as a tax exempt charitable organization, the Articles of Incorporation play a critical role. The IRS looks to the Articles to confirm that the organization is organized exclusively for permitted purposes and that its assets are permanently dedicated to the public good. Clear and compliant Articles make the IRS review process smoother and reduce the risk of delays or follow up questions.
Iowa Nonprofit Articles of Incorporation Requirements
One of the most common misconceptions is that Articles of Incorporation must be long and detailed. Under Iowa law, the required elements are actually quite limited.
What Iowa Law Requires in Articles of Incorporation
A valid set of Articles of Incorporation for an Iowa nonprofit must include the following:
The corporate name, which must be distinguishable from other entities authorized to do business in Iowa and must not imply an unlawful purpose
The name and street address of the initial registered agent and registered office
The name and address of each incorporator
A statement indicating whether the nonprofit will have members
A provision addressing the distribution of assets upon dissolution, consistent with law
If any of these elements are missing, the filing will be rejected.
What Iowa Law Allows but Does Not Require
In addition to the required elements, Iowa law allows nonprofits to include optional provisions if they choose. Common examples include:
A purpose clause describing why the organization exists
The names and addresses of initial directors
Governance provisions that could otherwise appear in the Bylaws
Liability limitation or indemnification language for directors
These provisions can be helpful, but they are not mandatory. Including more language than necessary does not automatically make the Articles better.
Why Knowing the Difference Matters
Understanding what must be included versus what may be included helps nonprofits avoid overloading their Articles. Many governance details are better handled in Bylaws, which are
easier to amend and adapt over time.
IRS Requirements for Charitable Nonprofit Articles
If an Iowa nonprofit intends to qualify as a charitable organization under Section 501(c)(3) of the Internal Revenue Code, the IRS expects certain provisions to appear in the Articles of
Incorporation.
Purpose Clause Requirements
The Articles must clearly limit the organization’s purposes to one or more exempt purposes recognized by the IRS, such as charitable, educational, religious, or scientific purposes. This language signals that the organization exists to benefit the public rather than private individuals.
Dissolution Clause Requirements
The Articles must state that if the organization dissolves, its remaining assets will be distributed for an exempt purpose or to a governmental entity for a public purpose. This ensures that charitable assets remain dedicated to charitable use.
Private Inurement and Political Activity Restrictions
The Articles should confirm that no part of the organization’s net earnings will benefit private individuals except through reasonable compensation for services, and that the organization will
comply with restrictions on political activity. These provisions reinforce the nonprofit nature of the organization.
Common Articles of Incorporation Mistakes Iowa Nonprofits Make
Even well intentioned organizations can run into trouble with their Articles. Common issues include:
Copying templates that do not match the organization’s mission or structure
Using purpose language that no longer reflects actual activities
Accidentally creating a membership structure when none was intended
Allowing Articles and Bylaws to contradict each other
Never updating Articles as the organization grows or evolves
These issues often remain hidden until the nonprofit applies for grants, completes major filings, or faces governance questions.
Articles of Incorporation vs Bylaws
What Belongs in the Articles of Incorporation
Articles are best limited to foundational information such as:
The existence and identity of the nonprofit
Core structural choices
Required tax exempt language
Articles establish the nonprofit but do not operate it day to day.
What Belongs in the Bylaws
Bylaws are where operational and governance details belong, including:
Board size and terms
Officer roles and duties
Meeting procedures
Voting rules
Because Bylaws are easier to amend, they provide flexibility as the organization changes.
Amended and Restated Articles of Incorporation in Iowa
When a Nonprofit Should Update Its Articles
Nonprofits often amend their Articles when:
The mission has evolved or narrowed
Tax exempt language needs clarification
Governance structure changes
Inconsistencies with Bylaws are discovered
Updating Articles is common and healthy.
How Amended and Restated Articles Work
Amended and restated Articles replace prior versions entirely with a single updated document. This approach creates clarity and avoids confusion caused by multiple amendments scattered
over time.
Filing Articles of Incorporation in Iowa
Registered Agents and Registered Offices
The registered agent is the individual or entity that receives official legal and government notices. Choosing someone reliable and engaged is essential.
Filing with the Iowa Secretary of State
Articles must be signed by an incorporator and filed with the Iowa Secretary of State. Filings are reviewed for compliance before acceptance.
The Organizational Meeting After Filing
Once the Articles are accepted, the board may hold its organizational meeting to adopt Bylaws, elect officers, and formally begin operations.
Why Well Drafted Articles Make Everything Else Easier
Thoughtful Articles of Incorporation support strong governance, smoother IRS interactions, clearer board decision making, and long term organizational stability. They help a nonprofit focus on its mission rather than fixing avoidable legal issues.
Final Thoughts on Articles of Incorporation for Iowa Nonprofits
Whether you are forming a new nonprofit or reviewing documents adopted years ago, Articles of Incorporation are worth careful attention. A short review at the right time can prevent years of
downstream problems and provide a solid foundation for meaningful work.
Frequently Asked Questions
Do Iowa nonprofits really need Articles of Incorporation?
Yes. Articles are required to legally form a nonprofit corporation in Iowa.
Can a nonprofit change its Articles later?
Yes. Iowa law allows nonprofits to file amended and restated Articles when updates are needed.
Do Articles of Incorporation have to match the Bylaws?
Yes. These documents should align. Conflicts can create governance confusion and legal risk.
Do small nonprofits need the same language as larger ones?
The legal requirements are the same, though the complexity of optional provisions may differ.
What happens if our Articles are outdated?
Outdated Articles can cause problems with grants, IRS filings, and board operations. Updating them is often a wise step.
So, How Do I Go About Getting Articles of Incorporation
Each organization is unique and it’s smart to enlist someone (like an attorney well-versed in nonprofit law!) to draft a quality, comprehensive set of articles personalized for your nonprofit’s needs, mission, and goals.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.png00Lexi Luneckashttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngLexi Luneckas2026-01-21 10:28:232026-01-21 10:39:37Iowa Nonprofit Articles of Incorporation: What They Are, Why They Matter, and How to Get Them Right
I believe it’s important to pay tribute to a man who profoundly championed equity, freedom, peace, and justice. Dr. Martin Luther King, Jr. was not only a visionary leader, but also a tireless advocate for nonviolent action and peaceful solutions to deeply rooted human rights issues. His productivity alone is staggering—he reportedly wrote five books and delivered hundreds of speeches in a single year, more than most of us will produce in a lifetime.
Dr. King’s leadership was instrumental in shaping the modern civil rights movement and influencing the passage of the Civil Rights Act of 1964. That same year, he was awarded one of the world’s highest honors, the Nobel Peace Prize, for his “dynamic leadership of the Civil Rights movement and steadfast commitment to achieving racial justice through nonviolent action.” In a powerful reflection of his values, Dr. King donated the entire prize—$54,123—to support the civil rights movement.
While we often remember Dr. King primarily for his work advancing racial justice, his vision for a better America was far broader. He spoke passionately about poverty, health care, economic justice, and women’s rights, always grounding his advocacy in a belief that real change required both moral courage and collective action. His public career lasted just twelve years—from the Montgomery bus boycott in 1956 to the sanitation workers’ strike in Memphis, where he was assassinated in 1968 at the age of 39. And now, his impact continues to shape our nation.
I see Dr. King’s dream of a more just and compassionate world reflected every day in the work of Iowa’s nonprofit organizations. I also see it in the generosity of the donors who support them—people who believe in advancing missions that strengthen communities and expand opportunity. Many Iowans even choose to extend that support beyond their lifetimes by including charitable legacies in their estate plans.
Dr. King’s example resonates because most of us share his desire to make our own corners of the world better places to live, learn, and grow. Perhaps his insistence on “practicing what you preach” has inspired you to give more generously or more intentionally. Maybe his question—“What’s your life’s blueprint?”—has prompted you to consider starting a nonprofit or formalizing the causes you care about most. However his words have moved you, the important thing is turning inspiration into action.
Martin Luther King Jr. Day may offer a day away from work, but its deeper purpose is reflection and service. Honoring Dr. King means committing ourselves to the advancement of our communities. Hold on to this sentiment by volunteering with an organization that speaks to your heart, supporting causes through charitable giving tools like donor-advised funds, or simply identifying the nonprofits you’d like to include as beneficiaries in your will.
Leaving a legacy is one of the most meaningful things we can do. It allows our values, convictions, and influence to live on through the people and organizations we care about. While our lives may not leave a mark on history like Dr. King’s, our individual legacies are no less significant to our families, our communities, and the missions we support.
So I’ll ask the same question Dr. King posed to so many: What will your legacy be?
If you’d like to explore charitable giving or legacy planning, don’t hesitate to contact me for a free consultation. As Dr. King reminded us, “The time is always right to do what is right.”
To revisit Dr. King’s “I Have a Dream” speech, watch the video below:
https://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.png00Lexi Luneckashttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngLexi Luneckas2026-01-19 15:16:522026-01-19 15:17:28Honoring Dr. King’s Legacy Through Service, Giving, and Lasting Impact
Setting Pay the Right Way: Why Your Nonprofit Needs a Clear Compensation Policy
January 14, 2026
I. INTRODUCTION
Setting compensation for employees and contractors is a core task for any nonprofit. These decisions affect people, finances, and public trust, which is why they should be guided by a clear and consistent Compensation Policy. Because compensation decisions are closely tied to a nonprofit’s tax-exempt status and governance obligations, they are also subject to regulatory scrutiny. The IRS underscores this importance by addressing compensation and compensation practices in multiple sections of Form 990.
A well-designed Compensation Policy helps organizations approach these decisions deliberately and with appropriate oversight, setting the stage for the standards discussed below.
II. WHY HAVE A COMPENSATION POLICY?
A. Employee Care and Morale
Every organization, regardless of size or success, is built on the individuals who carry out its mission. Fair and competitive compensation plays a critical role in employee satisfaction, retention, and morale. Competitive wages allow a nonprofit to attract qualified candidates and build a team that aligns with the organization’s values and goals.
B. Donor Confidence
Donors care not only about a nonprofit’s mission, but also about how that mission is carried out. Compensation practices are one area where donors may look for signs of ethical management and responsible stewardship of resources. A clear and organized Compensation Policy helps demonstrate that the organization takes its obligations seriously, including in how employees are compensated and supported.
C. Consistency
A written Compensation Policy promotes consistency by establishing guidelines, pay standards, and the use of comparability data. This structure reduces the need for ad hoc decision-making and helps save time and administrative resources. The policy can also serve as a helpful reference when responding to questions from donors, employees, or prospective hires, keeping the nonprofit’s messaging consistent.
D. Budget Targeting
Nonprofits operate within defined budgets, which may include restricted funds such as government or corporate grants. A well-drafted Compensation Policy helps ensure that compensation decisions align with budgetary constraints while still supporting recruitment and retention goals.
E. Legal Compliance and Reduced Risks of Lawsuit
A Compensation Policy also supports compliance with state and federal employment laws and plays a role in maintaining tax-exempt status. IRS Form 990 requests compensation-related information in multiple sections, including Part I, Part VI, Part VII, Part IX, and Schedule J. Without a structured policy, nonprofits may face increased risk of disputes or claims of unfair treatment. Having an attorney assist with drafting and periodically reviewing a Compensation Policy can significantly reduce legal and operational risks.
III. WHAT A COMPENSATION POLICY SHOULD INCLUDE
A. Purpose and Scope
A Compensation Policy, like most policies, should explain its own purpose and scope. It should state which forms of compensation it covers and should declare those forms of compensation to be reasonable, fair, and supported by appropriate data. It should also tie compensation back to the organization’s mission and public-charity status.
B. Assignment of Responsibility
A Compensation Policy should clearly identify who is responsible for reviewing and approving compensation decisions. Many organizations delegate this responsibility to a finance committee or similar body, with ultimate oversight resting with the board of directors.
C. Use of Comparability Data
An equitable Compensation Policy relies on comparability data to establish reasonable compensation levels. Comparability data should include, but not be limited to, the following:
1. Salary and benefit studies from independent sources;
2. Written job offers for similar positions at similar organizations (similar in ways like asset
size, geographic location, mission, staff, and services);
3. Documented discussions with similar nonprofit or for-profit organizations; and
4. Information obtained from IRS Form 990 filings of comparable organizations.
All compensation decisions, including the data relied upon and any deviations from it, should be documented and retained in the organization’s records.
D. Conflicts Of Interest
Any board member or member of a finance or similar committee with the power to make compensation-related decisions should, of course, recuse themselves from doing so when they stand to make a personal benefit, such as deciding their own salary, or the salary of a spouse or close family member. While these situations should be majorly addressed in a separate Conflict of Interest Policy, reiterating this requirement in the Compensation Policy helps avoid even the appearance of impropriety.
E. Documentation and Transparency
All compensation decisions should be documented in a timely and consistent manner. A Compensation Policy should promote this by defining documentation practices and standards. Clear records support accountability and compliance with reporting obligations.
F. Periodic Review
As with other key governance policies, a Compensation Policy should be reviewed and approved initially by the board of directors. However, it’s incredibly important that the board is not only involved in the creation of the policy, but also in the maintenance of it. Because it will undoubtedly need updating at some point, the Compensation Policy should address its own amenability, including the specifics of who and under what circumstances it can be reviewed or updated.
IV. CONCLUSION
Nonprofits of all sizes benefit from a clear, equitable Compensation Policy. It provides guidance for leadership, reassurance for employees, transparency for donors, and support for compliance and reporting obligations.
If you’d like guidance on drafting, updating, or reviewing your Compensation Policy, I’m happy to help. Reach out anytime at gordon@gordonfischerlawfirm.comto start the conversation. I offer a free consultation!
Iowa Nonprofit Articles of Incorporation: What They Are, Why They Matter, and How to Get Them Right
NonprofitsJanuary 21, 2026
Why Articles of Incorporation Matter More Than You Think
When people start a nonprofit, Articles of Incorporation often feel like a formality. Something you file once, put in a folder, and never think about again. In reality, Articles of Incorporation are one of the most important documents your nonprofit will ever adopt. They are the legal foundation of the organization. When they are clear and aligned with Iowa law and IRS expectations, everything that follows is easier. When they are vague, outdated, or copied from a generic template, problems tend to surface later, usually when the stakes are higher.
This guide is designed to explain what Articles of Incorporation actually do for Iowa nonprofits, what truly matters in drafting them, and how to approach this document with confidence.
How Articles Create a Nonprofit Under Iowa Law
Articles of Incorporation are the document that legally brings a nonprofit corporation into existence under Iowa law. Until they are filed and accepted by the Iowa Secretary of State, the organization does not exist as a legal entity. Once filed, the nonprofit can open bank accounts, enter into contracts, hold board meetings, and begin operating in a formal and recognized way.
Why Articles Matter for Federal Tax Exempt Status
If a nonprofit intends to apply for recognition as a tax exempt charitable organization, the Articles of Incorporation play a critical role. The IRS looks to the Articles to confirm that the organization is organized exclusively for permitted purposes and that its assets are permanently dedicated to the public good. Clear and compliant Articles make the IRS review process smoother and reduce the risk of delays or follow up questions.
Iowa Nonprofit Articles of Incorporation Requirements
One of the most common misconceptions is that Articles of Incorporation must be long and detailed. Under Iowa law, the required elements are actually quite limited.
What Iowa Law Requires in Articles of Incorporation
A valid set of Articles of Incorporation for an Iowa nonprofit must include the following:
What Iowa Law Allows but Does Not Require
In addition to the required elements, Iowa law allows nonprofits to include optional provisions if they choose. Common examples include:
These provisions can be helpful, but they are not mandatory. Including more language than necessary does not automatically make the Articles better.
Why Knowing the Difference Matters
Understanding what must be included versus what may be included helps nonprofits avoid overloading their Articles. Many governance details are better handled in Bylaws, which are
easier to amend and adapt over time.
IRS Requirements for Charitable Nonprofit Articles
If an Iowa nonprofit intends to qualify as a charitable organization under Section 501(c)(3) of the Internal Revenue Code, the IRS expects certain provisions to appear in the Articles of
Incorporation.
Purpose Clause Requirements
The Articles must clearly limit the organization’s purposes to one or more exempt purposes recognized by the IRS, such as charitable, educational, religious, or scientific purposes. This language signals that the organization exists to benefit the public rather than private individuals.
Dissolution Clause Requirements
The Articles must state that if the organization dissolves, its remaining assets will be distributed for an exempt purpose or to a governmental entity for a public purpose. This ensures that charitable assets remain dedicated to charitable use.
Private Inurement and Political Activity Restrictions
The Articles should confirm that no part of the organization’s net earnings will benefit private individuals except through reasonable compensation for services, and that the organization will
comply with restrictions on political activity. These provisions reinforce the nonprofit nature of the organization.
Common Articles of Incorporation Mistakes Iowa Nonprofits Make
These issues often remain hidden until the nonprofit applies for grants, completes major filings, or faces governance questions.
Articles of Incorporation vs Bylaws
What Belongs in the Articles of Incorporation
Articles are best limited to foundational information such as:
Articles establish the nonprofit but do not operate it day to day.
What Belongs in the Bylaws
Bylaws are where operational and governance details belong, including:
Because Bylaws are easier to amend, they provide flexibility as the organization changes.
Amended and Restated Articles of Incorporation in Iowa
When a Nonprofit Should Update Its Articles
Nonprofits often amend their Articles when:
Updating Articles is common and healthy.
How Amended and Restated Articles Work
Amended and restated Articles replace prior versions entirely with a single updated document. This approach creates clarity and avoids confusion caused by multiple amendments scattered
over time.
Filing Articles of Incorporation in Iowa
Registered Agents and Registered Offices
The registered agent is the individual or entity that receives official legal and government notices. Choosing someone reliable and engaged is essential.
Filing with the Iowa Secretary of State
Articles must be signed by an incorporator and filed with the Iowa Secretary of State. Filings are reviewed for compliance before acceptance.
The Organizational Meeting After Filing
Once the Articles are accepted, the board may hold its organizational meeting to adopt Bylaws, elect officers, and formally begin operations.
Why Well Drafted Articles Make Everything Else Easier
Thoughtful Articles of Incorporation support strong governance, smoother IRS interactions, clearer board decision making, and long term organizational stability. They help a nonprofit focus on its mission rather than fixing avoidable legal issues.
Final Thoughts on Articles of Incorporation for Iowa Nonprofits
Whether you are forming a new nonprofit or reviewing documents adopted years ago, Articles of Incorporation are worth careful attention. A short review at the right time can prevent years of
downstream problems and provide a solid foundation for meaningful work.
Frequently Asked Questions
Do Iowa nonprofits really need Articles of Incorporation?
Yes. Articles are required to legally form a nonprofit corporation in Iowa.
Can a nonprofit change its Articles later?
Yes. Iowa law allows nonprofits to file amended and restated Articles when updates are needed.
Do Articles of Incorporation have to match the Bylaws?
Yes. These documents should align. Conflicts can create governance confusion and legal risk.
Do small nonprofits need the same language as larger ones?
The legal requirements are the same, though the complexity of optional provisions may differ.
What happens if our Articles are outdated?
Outdated Articles can cause problems with grants, IRS filings, and board operations. Updating them is often a wise step.
So, How Do I Go About Getting Articles of Incorporation
Each organization is unique and it’s smart to enlist someone (like an attorney well-versed in nonprofit law!) to draft a quality, comprehensive set of articles personalized for your nonprofit’s needs, mission, and goals.
Questions? Want to learn more about turning your dream of an organization that makes a significant impact or positive change? Grab my complimentary Nonprofit Formation Guide and then contact GFLF for a free consult!
Honoring Dr. King’s Legacy Through Service, Giving, and Lasting Impact
Charitable GivingJanuary 19, 2026
I believe it’s important to pay tribute to a man who profoundly championed equity, freedom, peace, and justice. Dr. Martin Luther King, Jr. was not only a visionary leader, but also a tireless advocate for nonviolent action and peaceful solutions to deeply rooted human rights issues. His productivity alone is staggering—he reportedly wrote five books and delivered hundreds of speeches in a single year, more than most of us will produce in a lifetime.
Dr. King’s leadership was instrumental in shaping the modern civil rights movement and influencing the passage of the Civil Rights Act of 1964. That same year, he was awarded one of the world’s highest honors, the Nobel Peace Prize, for his “dynamic leadership of the Civil Rights movement and steadfast commitment to achieving racial justice through nonviolent action.” In a powerful reflection of his values, Dr. King donated the entire prize—$54,123—to support the civil rights movement.
While we often remember Dr. King primarily for his work advancing racial justice, his vision for a better America was far broader. He spoke passionately about poverty, health care, economic justice, and women’s rights, always grounding his advocacy in a belief that real change required both moral courage and collective action. His public career lasted just twelve years—from the Montgomery bus boycott in 1956 to the sanitation workers’ strike in Memphis, where he was assassinated in 1968 at the age of 39. And now, his impact continues to shape our nation.
I see Dr. King’s dream of a more just and compassionate world reflected every day in the work of Iowa’s nonprofit organizations. I also see it in the generosity of the donors who support them—people who believe in advancing missions that strengthen communities and expand opportunity. Many Iowans even choose to extend that support beyond their lifetimes by including charitable legacies in their estate plans.
Dr. King’s example resonates because most of us share his desire to make our own corners of the world better places to live, learn, and grow. Perhaps his insistence on “practicing what you preach” has inspired you to give more generously or more intentionally. Maybe his question—“What’s your life’s blueprint?”—has prompted you to consider starting a nonprofit or formalizing the causes you care about most. However his words have moved you, the important thing is turning inspiration into action.
Martin Luther King Jr. Day may offer a day away from work, but its deeper purpose is reflection and service. Honoring Dr. King means committing ourselves to the advancement of our communities. Hold on to this sentiment by volunteering with an organization that speaks to your heart, supporting causes through charitable giving tools like donor-advised funds, or simply identifying the nonprofits you’d like to include as beneficiaries in your will.
Leaving a legacy is one of the most meaningful things we can do. It allows our values, convictions, and influence to live on through the people and organizations we care about. While our lives may not leave a mark on history like Dr. King’s, our individual legacies are no less significant to our families, our communities, and the missions we support.
So I’ll ask the same question Dr. King posed to so many: What will your legacy be?
If you’d like to explore charitable giving or legacy planning, don’t hesitate to contact me for a free consultation. As Dr. King reminded us, “The time is always right to do what is right.”
To revisit Dr. King’s “I Have a Dream” speech, watch the video below:
Why Your Nonprofit Needs a Clear Compensation Policy
NonprofitsSetting Pay the Right Way: Why Your Nonprofit Needs a Clear Compensation Policy
January 14, 2026
I. INTRODUCTION
Setting compensation for employees and contractors is a core task for any nonprofit. These decisions affect people, finances, and public trust, which is why they should be guided by a clear and consistent Compensation Policy. Because compensation decisions are closely tied to a nonprofit’s tax-exempt status and governance obligations, they are also subject to regulatory scrutiny. The IRS underscores this importance by addressing compensation and compensation practices in multiple sections of Form 990.
A well-designed Compensation Policy helps organizations approach these decisions deliberately and with appropriate oversight, setting the stage for the standards discussed below.
II. WHY HAVE A COMPENSATION POLICY?
A. Employee Care and Morale
Every organization, regardless of size or success, is built on the individuals who carry out its mission. Fair and competitive compensation plays a critical role in employee satisfaction, retention, and morale. Competitive wages allow a nonprofit to attract qualified candidates and build a team that aligns with the organization’s values and goals.
B. Donor Confidence
Donors care not only about a nonprofit’s mission, but also about how that mission is carried out. Compensation practices are one area where donors may look for signs of ethical management and responsible stewardship of resources. A clear and organized Compensation Policy helps demonstrate that the organization takes its obligations seriously, including in how employees are compensated and supported.
C. Consistency
A written Compensation Policy promotes consistency by establishing guidelines, pay standards, and the use of comparability data. This structure reduces the need for ad hoc decision-making and helps save time and administrative resources. The policy can also serve as a helpful reference when responding to questions from donors, employees, or prospective hires, keeping the nonprofit’s messaging consistent.
D. Budget Targeting
Nonprofits operate within defined budgets, which may include restricted funds such as government or corporate grants. A well-drafted Compensation Policy helps ensure that compensation decisions align with budgetary constraints while still supporting recruitment and retention goals.
E. Legal Compliance and Reduced Risks of Lawsuit
A Compensation Policy also supports compliance with state and federal employment laws and plays a role in maintaining tax-exempt status. IRS Form 990 requests compensation-related information in multiple sections, including Part I, Part VI, Part VII, Part IX, and Schedule J. Without a structured policy, nonprofits may face increased risk of disputes or claims of unfair treatment. Having an attorney assist with drafting and periodically reviewing a Compensation Policy can significantly reduce legal and operational risks.
III. WHAT A COMPENSATION POLICY SHOULD INCLUDE
A. Purpose and Scope
A Compensation Policy, like most policies, should explain its own purpose and scope. It should state which forms of compensation it covers and should declare those forms of compensation to be reasonable, fair, and supported by appropriate data. It should also tie compensation back to the organization’s mission and public-charity status.
B. Assignment of Responsibility
A Compensation Policy should clearly identify who is responsible for reviewing and approving compensation decisions. Many organizations delegate this responsibility to a finance committee or similar body, with ultimate oversight resting with the board of directors.
C. Use of Comparability Data
An equitable Compensation Policy relies on comparability data to establish reasonable compensation levels. Comparability data should include, but not be limited to, the following:
1. Salary and benefit studies from independent sources;
2. Written job offers for similar positions at similar organizations (similar in ways like asset
size, geographic location, mission, staff, and services);
3. Documented discussions with similar nonprofit or for-profit organizations; and
4. Information obtained from IRS Form 990 filings of comparable organizations.
All compensation decisions, including the data relied upon and any deviations from it, should be documented and retained in the organization’s records.
D. Conflicts Of Interest
Any board member or member of a finance or similar committee with the power to make compensation-related decisions should, of course, recuse themselves from doing so when they stand to make a personal benefit, such as deciding their own salary, or the salary of a spouse or close family member. While these situations should be majorly addressed in a separate Conflict of Interest Policy, reiterating this requirement in the Compensation Policy helps avoid even the appearance of impropriety.
E. Documentation and Transparency
All compensation decisions should be documented in a timely and consistent manner. A Compensation Policy should promote this by defining documentation practices and standards. Clear records support accountability and compliance with reporting obligations.
F. Periodic Review
As with other key governance policies, a Compensation Policy should be reviewed and approved initially by the board of directors. However, it’s incredibly important that the board is not only involved in the creation of the policy, but also in the maintenance of it. Because it will undoubtedly need updating at some point, the Compensation Policy should address its own amenability, including the specifics of who and under what circumstances it can be reviewed or updated.
IV. CONCLUSION
Nonprofits of all sizes benefit from a clear, equitable Compensation Policy. It provides guidance for leadership, reassurance for employees, transparency for donors, and support for compliance and reporting obligations.
If you’d like guidance on drafting, updating, or reviewing your Compensation Policy, I’m happy to help. Reach out anytime at gordon@gordonfischerlawfirm.com to start the conversation. I offer a free consultation!